Calculations
The price paid for payment protection insurance can vary quite significantly depending on the lender. A survey of forty-eight major lenders by Which? Ltd found the price of PPI was 16-25% of the amount of the debt.
PPI premiums may be charged on a monthly basis or the full PPI premium may be added to the loan up-front to cover the cost of the policy. With this latter payment approach, known as a “Single Premium Policy”, the money borrowed from the provider to pay for the insurance policy incurs additional interest, typically at the same APR as is being charged for the original sum borrowed, further increasing the effective total cost of the policy to the customer.
Payment protection insurance on credit cards is calculated differently from lump sum loans, as initially there is no sum outstanding and it is unknown if the customer will ever use their card facility. However, in the event that the credit facility is used and the balance is not paid in full each month, a customer will be charged typically between 0.78% and 1% or £0.78 to £1.00 from every £100 which is a balance of their current card balance on a monthly basis, as the premium for the insurance. When interest on the credit card is added to the premium, it can become very expensive. For example, the cost of PPI for the average credit card in the UK charging 19.32% on an average of £5,000 each month adds an extra £3,219.88 in premiums and interest.
With lump sum loans PPI premiums are paid upfront with the cost from 13% to 56% of the loan amount as reported by the Citizens Advice Bureau (CAB) who launched a Super Complaint into what it called the Protection Racket.
PPI premiums as proportion of loan: cases reported
| Loan Type | Loan Amount | PPI premium | Premium % of loan |
|---|---|---|---|
| Unsecured personal loan | £8,993 | £2,217 | 25% |
| Unsecured personal loan | £11,000 | £5,133 | 47% |
| Hire purchase for car | £5,059 | £2,157 | 43% |
| Hire purchase for car | £6,895 | £2,317 | 34% |
| Unsecured loan | £5,600 | £744 | 13% |
| Secured loan | £25,000 | £12,127 | 49% |
| Secured loan | £35,000 | £10,150 | 29% |
| Conditional sale for car | £4,300 | £2,394 | 56% |
When interest is charged on the premiums, the cost of a single premium policy increases the cost geometrically. The above secured loan of £25,000 over a 25 year term and 4.5% interest costs the customer an additional £20,221.74 for PPI. Moneymadeclear calculates the repayment for that loan to be £138.96 a month whereas a stand alone payment protection policy for say a 30 year old borrowing the same amount covering the same term would cost the customer £1992 in total, almost one tenth of the cost of the single premium policy.
Read more about this topic: Payment Protection Insurance
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